A ‘Brexit’ Map for Sterling

The United Kingdom reached an agreement with the European Union and the UK announced that the referendum vote will take place on 23 June 2016.

We map out where the pound could go in the event of a “Brexit”, how much of a rebound is likely with a vote to “Remain”, and the potential for further currency weakness between now and June.

What happens to EUR/GBP if the UK votes to stay in the European Union?

We think that EUR/GBP should revert to the 0.73 level, near which it spent most of last year. In our view, the largest part of the weakness in sterling since November can be attributed to increased concern over the possibility of exit from the EU.

What happens to EUR/GBP if the UK votes to leave (“Brexit”)?

We estimate the exchange rate level that would accommodate a sharp correction in the UK’s current account deficit and find that EUR/GBP could go to parity.

In the near-term, we forecast EUR/GBP rising to 0.84 (and GBP/USD falling to 1.36), reflecting the weighted probability of Remain/Leave scenarios. Our central view is that UK voters will ultimately elect to stay in the European Union and so, in our baseline scenario, we project EUR/GBP rebounding to 0.73 at end-2016 and settling to 0.75 at end-2017 (and GBP/USD at 1.59 and 1.60, respectively).